Will last Friday’s August jobs report showing that wages rose nearly 3% compared to a year ago finally convince the Federal Reserve that inflation really is starting to pick up steam?

That report was certainly good news for workers, who have waited a long time – since 2009, apparently – to see their wages rise by so much. But it also provides convincing evidence that 2% inflation – which the Fed has been trying to stoke for the past 10 years – has finally arrived. But will the Fed actually believe it and do something before it “overheats,” to use its word?

A hike in the federal funds rate to 2.25% at the Fed’s September 25-26 monetary policy seems like it’s already baked in the cake. But it’s still not a given that another one will happen at the December meeting. According to CME’s Market Watch tool, the odds of a rate hike at the yearend confab are only 72%, compared to more than 98% for this month’s meeting. (While the Fed does meet in early November – just a day after the “most important election in our nation’s history,” if you believe some of the political pundits – a rate change then is very unlikely. The Fed has indicated that it will only adjust rates at a meeting that ends with a press conference by the Fed chair. That pretty much disqualifies November).

After the jobs report was released, the yield on the two-year Treasury note hit 2.70%, its highest level in more than 10 years. The benchmark 10-year note closed last week at 2.94%, its highest point in over a month. That those rates didn’t go even higher seems to indicate that the market isn’t yet sold on two more rate increases this year.

At least one member of the Fed is.

Eric Rosengren, the president of the Boston Fed, told the Wall Street Journal that the Fed should raise the fed funds rate in each of the next four quarters, starting with September. “I don’t think there’s anything special about pausing at any one point,” he added.

Rosengren dismissed the idea of a “neutral” fed funds rate, meaning one that’s high enough to keep inflation in check but low enough not to stifle economic growth, now expected to hit 4.4% this quarter, up from 4.2% in the second quarter. “We don’t know with any kind of precision” where the neutral rate is, he said, “but it’s certainly higher than where we are now and is likely to be maybe a percentage point higher than we are now.”

Yet, some Fed members remain unconvinced. James Bullard, the president of the St. Louis Fed and a long-time dove, doesn’t even support a rate hike this month, although he doesn’t have a vote this time around. He made his comments before the August jobs report came out, although it’s hard to believe he would support a rate increase even now.

While I agree with Rosengren that the fed funds rate is currently too low and that we really don’t know what the “neutral” rate is until the Fed overshoots it, I think the threshold is a lot lower than it used to be.

While the yield on the 10-year Treasury(NYSEARCA:IEF) note is certainly far above its lowest rate ever – 1.38% reached two years ago – it’s still pretty close to historic lows. In the decade before the global financial crisis, the yield was more commonly in the 4% to 5% range, well above current levels. Way back in prehistoric times – the 1990s – the yield was more typically in the 6% to 7% range. How would investors, borrowers and business owners – many of whom don’t remember rates that high – react today if long-term rates soared to those levels again?

I’m not suggesting that’s going to happen. But I am suggesting that for rates to be considered “too high” today isn’t very high at all, at least by historical standards.

Look what’s already happening in the mortgage industry, where refinance business has largely evaporated and purchase mortgage volume is also down, even with 30-year fixed-rate loans still well below 5%. That’s because 5% looks awfully steep when you’ve become accustomed to rates below 4%. It’s all relative.

Still, what if the Fed has to drive the fed funds rate back to say, 5%, where it was before the financial crisis if inflation does get out of control? A 5% fed funds rate, remember, is not that unusual in the historical context. And it’s not out of the question in the next few years given a smoking economy following a decade of artificially low interest rates, massive Fed bond buying and wildly accommodative monetary policy. At some point, the bill comes due.

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